Evidence that the Fed may have abused its power to pressure Bank of America into acquiring Merrill Lynch could make it unlikely that congress will go along with Obama’s plan to extend the Fed’s regulatory power. Congress is voicing doubts about giving any more authority to the Federal Reserve. For more, see the following article from Money Morning.
Documents brought to light by key by congressional investigators highlight real disagreement between top-level U.S. Federal Reserve officials about how it should address the Bank of America Corp.(NYSE: BAC) acquisition of Merrill Lynch & Co. Inc. are almost certain to fuel the ongoing congressional debate over the central bank’s push to expand its authority over the U.S. financial system.
This growing concern manifested itself Thursday, when Fed Chairman Ben S. Bernanke; was grilled by Capitol Hill lawmakers during a congressional hearing looking into the central bank’s conduct in BofA’s buyout of Merrill Lynch. Bernanke’s failure to resolve some of the most-pointed questions posed by congressional leaders – (especially Republicans) who wanted to discover whether the Fed overstepped its authority and interfered with merger-related decisions – may undermine a proposed financial system overhaul that would imbue the central bank with broad authority over big U.S. financial institutions. One example: In the Bank of America deal for Merrill Lynch, lawmakers felt that Bernanke & Co. should’ve required more concessions in return for the taxpayer-supplied financial aid, Bloomberg News said.
The bottom line: The additional oversight powers that Bernanke is seeking – and that are part and parcel of the proposed Obama administration financial-system overhaul may prove to be one very tough sell.
Both parties are likely to find fault with U.S. President Barack Obama’s plan to put the Fed on the point, positioning it as the single agency responsible for supervising the U.S. economy’s largest and most-interconnected banks and financial institutions, giving the central bank the power to dictate financial standards on capital, management of risk and even liquidity requirements.
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“It may be more important for us to find another systemic risk regulator,” U.S. Rep. Paul Kanjorski, D-Pa., who is a member of the House Oversight Committee where Bernanke appeared, told Bloomberg TV. Congress should “hesitate to put any more authority on the back of the Federal Reserve.”
The internal central bank documents – e-mails, written notes and even official memos paint a picture of a government institution that’s “wrestling” with how tough it should be on BofA and other big banks, The Wall Street Journal reported. In December, Bank of America told federal officials it was looking to possibly end the deal, and current and former bank officials contend that the Fed and former Bush administration officials pressured BofA to go through with the deal, which has turned out to be much-less beneficial than hoped for.
On the other hand, these disclosures could bolster the argument by Fed officials that the central bank needs these powers to address future financial crises. The reason: These disclosures show that it lacked the “tools” (the legislated power and authority) needed to tackle the problems as soon as they surfaced. The inability to do so probably lengthened the crisis and exacerbated both the damages – as well as its ultimate cost.
A Congressional tongue-lashing didn’t keep Bernanke and Fed policymakers from completing their business at hand. Last week’s policy meeting provided few surprises as the Fed left the benchmark Fed Funds rate unchanged at (virtually) 0% and announced that no rate changes seem likely in the near-term. The Fed also confirmed its intent to buy $1.45 trillion in mortgage-related securities and $300 billion in Treasuries, though made no commitment to purchase more than that previously announced amount. The accompanying statement depicted an economy that remained weak, but seemed to be exhibiting some signs of rebounding (ever so slightly). For the time being, inflation (or even deflation) does not appear to be of major concern. The policymakers also continued to apprise the public on the success of the various “stimulus” actions and announced the closing of several lending programs that they no longer deem necessary.
The World Bank said the worldwide slump would be worse than it has previously projected, boosting its forecasted slump to 3% from the previous forecast which called for a slump of 1.75% – and claimed that activity would be the worst on record. By contrast, the Paris-based Organization for Economic Cooperation and Development reported that the “worst may soon be over” and revised its economic forecast to more favorable terms for the first time in two years.
Among weekly releases, new home sales declined in May and existing home sales rose less than expected as much of the buying centered around distressed sales and foreclosures. The median price of an existing home purchased in May was more than 16% below last year’s level.
Higher durable goods orders lent some confidence to manufacturers, as activity rose for the second consecutive month. Personal income and spending both increased in May and the administration was quick to praise the benefits of the stimulus package. However, the savings rate also climbed to its highest level in 15 years as consumers remained uncertain about the economy in general and their job situations in particular. On a bright note, the Reuters/University of Michigan Sentiment index increased to its highest level since February 2008. Gross domestic product (GDP) in the first quarter was revised again – to minus 5.5% (from minus 5.7% reported last month), a positive sign, though impatient economists and investors alike seem ready for even better (positive) data in the quarters to come.
This article has been reposted from Money Morning. You can also view this article at Money Morning, a finance and economics news site.